We begin there simply because of President Trump’s recent speak-his-mind blurb, "The problem I have is with the Fed. The Fed is going wild. I mean, I don't know what their problem is that they are raising interest rates and it's ridiculous… The problem [causing the market drop] in my opinion is Treasury and the Fed. The Fed is going loco and there's no reason for them to do it.“ Depending on who you talk to this is either heresy or refreshing. We are not here to call it either way: just explain the reason a mere 200 bps increase in the Fed Funds rate since 2015 is causing volatility in the markets today. So as market pundits/Trump come to the media and talk their specific books…and understand nearly all of the market pundits are managers of long only equity, real estate, private equity and/or bonds…they are simply channeling their inner Garth Algar from the movie Wayne's World, “We fear change.”

“Keep it simple, when you get too complex you forget the obvious.” – Hall of Fame basketball coach Al McGuire

We are not here to scream the sky is falling but rather to present simple economic data. Take a look at the FRED chart below. The shaded grey bands represent recessions, the green line the unemployment rate, the red line PCE and the blue line the Fed Funds Rate. The first simple takeaway: markets are cyclical and the Fed has clearly tried to dampen those market cycles by moving rates both up and down. The second simple takeaway is shown by the periods the Fed Funds Rate has remained way below the Fed’s preferred inflation level. The first was following the tech bust when Fed Funds were kept below PCE for nearly four years. The second period with Fed Funds below PCE began in 2009 and still remains after 10 years despite the unemployment rate having now fallen to a 48-year low.

Now look at the chart of global sector indebtedness. The first simple takeaway: from 1997 to 2007 households and the financial sector debt went bonkers. Now look at the second period from 2007 to today. Non-financial corporations and governments have clearly gone bonkers.

Finally take a look at major central bank asset accumulation over time. While we don’t have the data pre-2007 trust us, it was flat. That said, the data post-2007 has gone bonkers.

Debt, PCE, Fed FundsFRED, Haver Analytics, IMF, IIF, BIS

Everyone knows what the massive amount of household and financial debt pre-2008 caused to our global economic system. Interest rates were held too low for too long allowing for poorer underwriting standards and a discounting of risk and massive complacency by rating agencies, investors and households. Today, as simply seen, the debt has been taken over by governments and non-financial corporations. Because rates have been so low for so long…again…debt has grown unabated…again. So when the POTUS steps up and complains about higher rates he speaks from the perspective of a real estate developer and debtor. A perspective he knows all too well regarding the impact of higher rates on debt prices and leverage: debt and leverage that began accelerating long ago.

Trust us: the chorus of complaining short-term focused asset managers and politicians will only grow louder. Don’t be fooled: every time a politician or asset manager criticizes the Fed they are only talking their book and reacting like the pre-2007 over-leveraged homeowner hoping housing prices will never go down. The reality is debt globally is what has gone crazy because the Fed has kept rates too low for too long for a major portion of the last 20 years. Now that is simply “loco”.

Over the last 28 years, I have held financial management positions at both large and small business organizations. My broad experience includes equity and interest rate trading, portfolio and risk management, accounting, finance and the development of sophisticated financial...